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American Electric Power Company Inc. (NYSE:AEP)

Q3 2006 Earnings Call

October 31, 2006 9:00 am ET

Executives

Julie Sloat - Vice Present of IR

Mike Morris - Chairman, President and CEO

Holly Koeppel - EVP and CFO

Analysts

Michael Lapides - Goldman Sachs

John Kiani - Deutsche Bank

Craig Shere - Calyon Securities

Anthony Crowdell - Jefferies & Co

Paul Ridzon - Keybanc Capital Markets

Elizabeth Parrella - Merrill Lynch

Daniel Eggers - Credit Suisse First Boston

Greg Gordon - Citigroup

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American Electric Power Third Quarter 2006 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Ms. Julie Sloat. Please go ahead.

Julie Sloat

Thanks Pat. Good morning and thank you for joining us today to discuss AEP's 2006 third quarter and nine months year-to-date earnings. I expect that you have seen the press release issued earlier today. It's also available on our web page at aep.com. In addition to the financial schedules included in the press release package, the webcast of this call will include visuals of charts and graphics referred to by AEP management during the call. An investor information packet will also be available at aep.com today at approximately 10 AM that will include the consolidated balance sheet and statement of cash flows, as well as full income statements for our utility operations, GAAP operations, investments, and parent company. The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to the SEC filings including the most recent annual reports on Form 10-K and quarter reports on Form 10-Q for discussion of factors that may cause results to differ from management’s projections, forecasts, estimates, and expectations.

Also on the call, we will discuss the measures about company performance; that is ongoing earnings versus reported earnings that differ from those recognized by generally accepted accounting principles or GAAP. You can find a reconciliation of these non-GAAP measures on our Investor Relations website at aep.com.

I will turn now the proceedings over to Mike Morris, Chairman, President, and CEO of the company to lead an opening presentation and then there will be time for questions. Mike?

Mike Morris

Thanks a lot Julie. I appreciate you being the lawyer today and making that statement. Welcome to all of you who have joined us today. It’s a bit anticlimactic after already having told you earlier in the month what we thought third quarter earnings would be with our pre-release on our 10/10 meeting. However, I hope you see that in fact that quarter close as we had hoped that it would and thought that it would; and we feel very comfortable about where we ended up at $0.99 per share on an ongoing basis. As you know, the sale of the Dow Plaquemine plant, which was occasioned by the failure of the Tractebel Energy Market in USA to live up to their contract terms, did have an impact on that quarter activity.

However, as I hope you will remember, in our discussions with, we see that as a constructive change for us not only in '06, but in '07 and beyond on the cost of running a plant and being responsible for supplying steam to Dow and Power at contract prices. The rest of the month in the quarter went pretty much as scheduled. Sales were strong. Holly will talk a bit about that. We were disappointed there without question. We have told you before that the Indiana and Virginia rate cases surely weren’t coming out in a timely fashion. I guess, like jury proceedings, when it takes a long time, you can't expect good things to happen and in fact that’s what we were experienced with.

We're not overly concerned; the Indiana depreciation case had an interesting order wherein the Commission said that the accounting was right, but that the implementation of the accounting wasn’t necessary. We are not sure that’s accurate. We continue to evaluate our potentials. We might well go back and ask the Commission to reconsider that point and if not, we might well go forward in a court proceeding, because it's very important that utilities, I guess, they are accounting right as they go forward. So, that’s one that we will continue to watch in that space.

As to the Virginia E&R case, as you know, I think the administrative law judge and I guess, they shared with you at one the [Merrill] conferences not long ago. She really decided it in on a process basis and laid out to going forward undertaking that one would have to pursue to implement the Virginia single purpose rate review issue as it pertains to reliability and/or environmental investments. And we were quite pleased with that, but you might remember that I mentioned, we weren’t satisfied with the result because she said that you couldn’t cover retroactive expenses and we don’t think that that's right.

And we were really emboldened by the Attorney General's filling to the Virginia Commission on the 13 of October, where they joined us really and arguing that that's a misreading of the law that in fact the process that the ALJ laid out is accurate but that this conclusion that you couldn’t go back to the date that the law was passed simply was wrong legally, and we share that opinion and made that argument in our brief and we will watch what the Virginia commission does with that. As to the overall Appalachia Virginia Rate Case, we have testimony from various parties not overly concerned about positions that people have taken but we will continue to pursue as you know that case testimony begins I believe in the month of December and we will go through the process as one would expect.

Our off-system sales were strong. Weather did impact the latter part of September in the retail side and again Holly will be more granular in those presentations. We continue not only to feel very comfortable with our guidance range for 2006 but equally comfortable with the guidance range that we talked to you about for '07, '08 and '09 on our meeting of October 10. Remember as we laid that out to you the operating end of those ranges would have us experiencing tremendous regulatory success. The lower range of those or the lower end of those ranges would find us with one or two disappointing regulatory outcomes. So again we feel very comfortable about the story that we share with you on 10/10, equally comfortable with the forecast of earnings for calendar year 2006. And we will continue to fall forward as we go. Holly?

Holly Koeppel

Thanks Mike. For the third quarter comparison year on year we reported GAAP earnings of $0.67 this quarter and ongoing earnings of $0.99. GAAP earnings were less than ongoing earnings as a consequence of the after-tax impairment of the Dow Plaquemine divestiture as Mike has previously discussed. That transaction was announced September 1. Ongoing earnings of $0.99 are composed of $0.96 from utility operations, $0.04 from investments and a negative $0.01 from the parent company. Our utility operations were essentially flat year-over-year, $0.97 in the third quarter of '05 versus $0.96 this quarter. Rate increases primarily in Ohio and Kentucky as well as the robust off-system sales that Mike mentioned were largely offset in the quarter by unfavorable weather year-to-year, increasing O&M and depreciation expenses as well as a decrease in third party transmission revenues.

On a cents per share basis weather was slightly better than normal by about $0.01 but on a year-to-year comparison for the quarter we were down $0.05 due to weather primarily in our eastern operating companies. Off-system sales were $75 million higher this quarter compared to last year primarily due to the strong performance of our east generation fleet in July and August as well as favorable results in our regional auction participation and the liquidation of financial hedge positions that were taken following the storms in the Gulf last fall.

Volume was down slight modestly just over 600 gigawatt/hours primarily due to outages we experienced in September. Depreciation and amortization expense was higher by 41 million attributable to our Virginia E&R write-off that Mike previously mentioned as well as an increase in deferred carrying costs associated with environmental retrofits in Ohio which we began amortizing.

Other income and deductions declined by $24 million again associated with our position taken on the Virginia E&R as a result of the hearing examiner's decision, our investment segments continue to show strong performance. On a quarter comparison it was up $18 million primarily due to MEMCO where we continue to experience higher freight rates underpinned by strong demand and a tight barge supply.

Turning on to the year-to-date performance, reported earnings year-to-date for September '06 were $2.08 with ongoing of $2.39 again the differential is due primarily to the Dow Plaquemine Cogen sale. For the nine months year-to-date ongoing earnings of $2.39 are composed of $2.29 from utility operations, $0.12 from investments and a negative $0.02 from the parent. Utility operations decreased year-on-year by $78 million during the first nine months. Higher retail sales associated with customer growth and rate relief mainly associated with the Ohio RSP were offset by the weather, a reduction in transmission revenues which we previously mentioned, an increased O&M due to higher plant outages and planned reliability spending.

We also experienced higher depreciation and amortization year on year, higher interest expense as well as lower other income in deductions again due to the Virginia E&R write-off. The impact of weather for the year on year comparison was a negative $0.11. When compared with normal we are $0.06 below normal for the year. Again this is attributable to our eastern operating companies. The investment segment has improved year over year contributing an additional $45 million or $0.12 again due to the continued strong performance at MEMCO while parent company year-to-date reflects a favorable $0.09 improvement over last year, attributable primarily to bond buy back costs that we experienced in '05.

Turning to the cash flow we ended the third quarter of 2006 with a cash balance of 259 million. This compares to a cash balance at the end of the third quarter of '05 of 849 million. You may recall that our cash balance was high last year primarily as a result of the HPL sale. For year to date cash flow from operations is 2.2 billon consisting of 815 million in continuing earnings when we add back the depreciation and amortization of 1.1 billion the pre-tax effect of the Dow impairment of 209 million as well as changes in working capital and our other assets and liabilities we arrive at the $2.2 billion. Our investing activities required cash outlays of $2.47 billion driven primarily by $2.445 billion in CapEx.

We did receive 137 million in cash from asset sales in the first quarter of '06, as covered with you then it was primarily due to our Centrica sharing payment as well as the sale of the Bahia plant. Financing activities year-to-date provided net cash increase of 119 million. As a result, our net change in cash was a negative 142 million, which produced an ending cash balance of 259 million. As you may know and as we discussed with you on October 10, on October 11, we received the proceeds of 1.7 billion from our Texas securitization bond at TCC. TCC then paid a special dividend of 585 million to the parent from these proceeds.

The company has also called a number of senior notes -- and we have also called 275 million or 5.5 senior notes during 2013 and redeemed 340 million in our company note. We are expecting to arrive at a cap structure of 60% debt and 40% capital after we have met the accelerated payments required by the competitive transition charge order at that company.

Turning to capitalization, we ended the quarter at 57.2% debt to cap. On a credit adjusted basis, the metrics were 57.9%. As you know our goal is to maintain a debt to cap ratio on a credit adjusted basis in the 60% range. The adjustments we make to reported numbers to arrive at our adjusted debt-to- cap ratio are intended to reflect what we think is closer to creditors' view. The adjustments include items such adding back debt associated with our $1.2 billion Rockport lease and $30 million of preferred stock, not subject to mandatory redemption and subtracting from that amount the debt from TCC securitization bond, since their serviced by Texas customers. TCC first mortgage bond that has been defeased as well as the nuclear spent fuel trust, since it is fully funded with cash that is not available to the company. With that Mike, we will turn to questions.

Mike Morris

Thank you very much Holly, and we look forward to your question and hopefully our answers.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from the line of Michael Lapides, please of ahead.

Michael Lapides - Goldman Sachs

One easy question, when in -- when or how should we think about the process for when discussion will occur to resolve what happens in Ohio after 2008? Time line for that?

Mike Morris

Sure, it's clear that as you know from one-on-one meetings that we have had, The Office Consumer Counsel has submitted a concept proposal, I think others are beginning to talk about that, we are clearly in the midst of very important gubernatorial election process here in Ohio, so the legislature is beginning to talk about it. I would expect the dialogue will heat up post election and be a center stage issue '07. I don’t think anyone wants to wait until the bewitching hour of '08 to figure out what we're going to do at the end of that calendar year. So I would think that’s a reasonable timeline, and I appreciate that as an opening question, and that’s an easy answer.

Michael Lapides - Goldman Sachs

Thank you.

Mike Morris

You bet.

Operator

Thank you. Our next question is from the line of John Kiani. Please go ahead.

John Kiani - Deutsche Bank

Good morning.

Mike Morris

Good morning, John.

John Kiani - Deutsche Bank

Sorry, I joined the call just a little bit late, but can you give --

Mike Morris

So, you didn’t hear all the good news then?

John Kiani - Deutsche Bank

Can you give a little bit more color on your initial comments on what regulatory disallowances were baked into the mid-point or the low end of the guidance range?

Mike Morris

No, I think that would be unfair to give that grand worth of data, because we don’t usually look at it that way, and a bulk basis, what I tried to say was that when we give a range, it has on the upper end very successful regulatory undertaking which as you know, we've mostly experienced in calendar '06. To Holly's point, we did take the impact of the Virginia E&R case. In this quarter, however, if in fact the attorney general is right and our brief holds up, you'll see that as a real positive as we go into '07. As to the depreciation case, it’s a really open issue. The Indiana decision by the Commission clearly states that the accounting is right, but that the change isn’t necessary. Well, the account rules are accounting rules, and if the accounting is right, it might be appropriate to implement the right accounting and we’ll just have to see how that goes, So, I don't think that we gave anymore detail than that, what I did say was that our updated forecast for '06 continues to be as we thought it would be, and as you know that's an increase from where started the year because of the successes that we have had throughout calendar '06, and we see no reason whatsoever to have any worry about our '07, '08, and '09 numbers.

John Kiani - Deutsche Bank

Got it. Thank you.

Mike Morris

You bet, John. Thanks.

Operator

Thank you, our next question is from Craig Shere. Please go ahead.

Craig Shere - Calyon Securities

Hi, two questions. First one, Holly, what's driving depreciation guidance, if you look at the first nine months, we are averaging 347 a quarter, the '07 guidance is averaging 353 a quarter, the Indiana depreciation case is put-off and fourth quarter appears to be 275 if I am understanding; yeah with the full year minus the nine months? And then I have another question.

Holly Koeppel

A couple of things, we did have an impact in the depreciation charge in the quarter associated with in essence to catch-up our deferred charges under the Virginia environmental and reliability rider, that impact was over $12 million; above and beyond the fact that we have been continuing to depreciate at current rates associated with Indiana. And so, there was no adjustment associated with Indiana in the quarter, but there was an adjustment associated with our interpretation in response in Virginia with regard to the E&R filing.

Craig Shere - Calyon Securities

And so the $12 million was for the third quarter or the fourth quarter?

Holly Koeppel

Third.

Craig Shere - Calyon Securities

Third, okay so, third quarter is more than a normal run rate would be based on the way all are timing for things now.

Holly Koeppel

Exactly, thank you.

Craig Shere - Calyon Securities

Okay, so -- and so you are implementing the Indiana depreciation now or you are not implementing it now?

Holly Koeppel

It's under review and we have not implemented it.

Craig Shere - Calyon Securities

Okay, okay. But even if I subtract $12 million, I am not getting to the 275 in the fourth quarter.

Holly Koeppel

I don’t know that I am either.

Craig Shere - Calyon Securities

Do you want to come back to us on that?

Mike Morris

Yeah.

Holly Koeppel

I think we are going to need to.

Mike Morris

I think it would be better if we did John, because I am with you if you take 347 and take off 12 million, that won't get you there. So, let see how that works.

Holly Koeppel

Yeah.

Craig Shere - Calyon Securities

Okay. And Mike or Holly whoever feels comfortable with the second question. Mike you mentioned, the kind of range of guidance is somewhat dictated by success with rate filings, but I guess this is a bit of a take-off on both John and Mike's question. As I understand pursuant to Mike's question, your long-term guidance assumes the continuation of the existing RSP growth in Ohio from 2009 where as -- it reasonably could be better than that. And also, your guidance excludes potential contributions from the Ohio transmission investment or reliability rider, the proposed PGM and SPP transmission investments and anything from IGCC projects, is that correct?

Mike Morris

That’s correct, John. And to the point, we see those as potential upsides if things work well. But I hope and this was part of the theme of our time together in earlier October -- in early October and that is that this management team's intent is to give you a robust view of our tomorrow that is achievable with a great deal of hard work and accomplishment. If we do better than that I'll be as pleased, as you will be, as will the shareholders, and the investors. But what I don’t want to do is promise incredible growth opportunities that simply might not be accomplishable because I think it's important to give you the strength that we think we see in our going forward world and deliver on that if not better than that rather than deliver some incredible number that some of my colleagues threw out. And then later on today how sorry we are, we didn't make that.

Craig Shere - Calyon Securities

That's fair let me rephrase my question a little bit to get some color. Do you feel that excluding these items from your guidance is appropriate conservatism or is it just that the bulk of returns from these items are going to be beyond the forecast horizon?

Mike Morris

Well it's a combination of the two. As you say I would expect the integrated gas activity as a real plus to the strength of this company going forward will be beyond that horizon. However, the filing that we made with the Commission here on reliability and would be well within the horizon as would some of the others that you mentioned. So it's kind of some are in and some are out of that timeline.

Craig Shere - Calyon Securities

Great, I appreciate the help.

Mike Morris

You bet. Thanks a lot Craig.

Operator

Alright. Thank you. Our next question is from Anthony Crowdell, please go ahead.

Anthony Crowdell - Jefferies & Co

Good morning. I think I’m just following up on the depreciation case, Indiana. I believe the '07 number included the $70 million from the depreciation case. I just wanted to go over what are the options to resolve this. Is there are a rate filing that we could do or I know you said you may bring it sort of core, could you just over the options to resolve the depreciation case?

Mike Morris

Well, you are still in the timeline where we can go back to the Commission and ask them to reconsider their decision and that would be the first move that we would take. Then we would have to, if the commission decides that what didn’t you understand about what we told you, then we would actually have to take a look at the appropriateness and the requirement to have proper accounting versus the ongoing relationship with the Indiana Commission, which is extremely important to us as well. It is clear that the license life of the Cook plant has been extended. It is clear therefore that the depreciation life of the asset has been extended and the appropriate accounting would call for that to be implemented. The issue here of course is that we are in a period of a rate freeze; this had no impact on the rate side, either plus or minus because this is accounting entries and really affects the shareholders' position of having the depreciation schedules match the reality of what the accounting rules cause us to do.

It’s a unique wrinkle and who knows what might come of that. Once we are through with the regulatory process that may give us an opportunity to visit with the commission to seek guidance on what else they might suggest that we do, because it just is wrong for any utility INM or any other of our operating companies or really any other utility to have depreciation schedule that doesn’t match the accounting rules.

Anthony Crowdell - Jefferies & Co

Thank you.

Operator

Right, thank you and we do have a question from Paul Ridzon. Please go ahead.

Mike Morris

Good morning Paul.

Paul Ridzon - Keybanc Capital Markets

Good morning Mike, how are you?

Mike Morris

Good.

Paul Ridzon - Keybanc Capital Markets

In your update on your strategic partner in Texas, are those talks still ongoing?

Mike Morris

See you in Las Vegas. I'm sorry what we mentioned was that we thought that we would share that data with folks when we go to the EEI Financial meeting in Las Vegas and I still have that hope and I have every reason to believe that we will be able to make those announcements then.

Paul Ridzon - Keybanc Capital Markets

It sounds like it's not quite across the goal line yet?

Mike Morris

Well I wouldn't go that far but it is not across the goal line to where we want a share, what we think is really kind of an intriguing undertaking.

Paul Ridzon - Keybanc Capital Markets

And then secondly, I thought I heard some mention of liquidating hedges, kind of wondering if you could give some flavors to the impact of that in more detail what that was and on the hurricane?

Holly Koeppel

Yeah we moved pretty aggressively to lock down a bit of our open position entered into some very attractively priced hedge positions that have liquidated in this quarter in particular.

Paul Ridzon - Keybanc Capital Markets

What was the benefit realized from those?

Holly Koeppel

We tend not to try and reveal that, but it was in excess of $70 million.

Paul Ridzon - Keybanc Capital Markets

Those are power sales or what kind of hedges were those?

Holly Koeppel

It was due to both, power and gas, but predominantly power.

Paul Ridzon - Keybanc Capital Markets

Okay, thank you.

Mike Morris

You bet, thanks Paul.

Operator

Thank you, and our next question is from Elizabeth Parrella, please go ahead.

Elizabeth Parrella - Merrill Lynch

Thank you. Just following up on that last question, are any of those hedges continuing into subsequent quarters, fourth quarter or '07 and kind of related question; when you look at your '07 guidance for Off-Systems sales in total, which I think is 672 million of margin contributions, is it possible to say how much of that, of those dollars are effectively locked or has been already?

Holly Koeppel

I would say that we are comfortable with the fourth quarter. We will continue to experience very attractive hedge liquidations and we are very confident with our guidance around that for Off-system sales. For '07 as you know, a portion of it is locked in, but it continues to move as we see opportunities in the market and we take advantage of those opportunities.

Mike Morris

Remember Elizabeth, that much of what we have experienced even here in '06 was kind of a unique set of facts that plays very well for our footprint particularly inside of the PJM larger market footprint now and that is that, if the weather is off saying that it’s a bit warmer than normal here, that gives the generation fleet and Brian Tierney and commercial ops a considerable amount of megawatt hours to put into that market place. So, when you compare '05 or excuse me the '06 performance to the '07 forecast, that is just reflective of what we think is achievable but again has some potential strength with it. And unless you have a follow-up question, I am a little disappointed, you aren't going to ask me about my '06 coal prices because as everyone, we are experiencing some downdraft in the price of coal and Chuck Zebula, I know you very well and his team have done an excellent job, where we were looking at a 10% to 13% year-over-year increase, we are now looking at an 8% to 10%.

Elizabeth Parrella - Merrill Lynch

Okay and just one other, actually two other quick question if I may, were emission allowance sales meaningful this quarter relative to where they have been in past quarters or can you tell us how much they were?

Holly Koeppel

We didn’t have much in the way of -- we had less in the third quarter of '06 than we had in -- wait I've got this reverse, Julie don’t -- I am sorry, I am reading off the charting here and the columns are reversed. We sold more this quarter than we did in the same quarter last year, and was in the range of $20 million.

Elizabeth Parrella - Merrill Lynch

Okay. And a last question on the regulatory side which is, if you can just go back to Indiana for a minute; can you tell us what your earning ROE was in Indiana?

Mike Morris

No, I sure can't. I would tell you that it's in a reasonable range viewed at the authorized rate of return from the last official rate review that we have had in Indiana.

Elizabeth Parrella - Merrill Lynch

Okay. Thank you.

Mike Morris

You bet.

Operator

Thank you, and we have a question from the line of Daniel Eggers. Please go ahead.

Daniel Eggers - Credit Suisse First Boston

Hi, good morning. (inaudible) question first on MEMCO. It looks like you guys have already exceeded the full year 2006 guidance. I assume -- can we assume that fourth quarter will look something comparable to third quarter?

Mike Morris

Well, this is time of the year when activity slows down a bit on the river and in fact we were out with the MEMCO team just a while ago with. We feel very comfortable about '06, we might end up with additional pluses as the year and the last couple of months unfolds; but we see a bit upside potential but not a great deal. I wouldn’t take fourth quarter and just implement third quarter results to it.

Daniel Eggers - Credit Suisse First Boston

And if we look at next year, you guys have exceeded basically your guidance for '07 at MEMCO through the first three quarters of '06, is that attributable just to the fact that '06 was that much better than normal and we should assume some normalization next year?

Mike Morris

No, I think when you look at the MEMCO numbers '07 to '06, we had an opportunist lease opportunity on additional barges that were available on the river system and we took that opportunity. Those barges will fall off lease, and unless we can fill that in, we'll just simply have less barges to continue to move product on the river. So, we'll keep looking for that, but as you can well imagine those who would lease equipment like that year-over-year, I think lease rates ought to go up as well. So, we'll be of cautious about how we go about doing that.

Daniel Eggers - Credit Suisse First Boston

Okay, and on Off-System sales, you guys said you had a good July and August planned performance, if I were to look at gross margins for that business and strip out the $70 million or opportunistic hedges, just because it's hard to image those get repeated to that magnitude. Your gross margin per megawatt/hour was still quite good on a year-over-year basis up, in excess of 10% probably. Is that largely a function of July and August just really hitting the sweet spot as far as having the plants operating, and we -- is there opportunity that could occur again in the future?

Mike Morris

I think you've got that exactly right Dan, and I would tell you that that’s the charge that Nick Akins and Bill Sigmund and Mike Rencheck have is to make certain that our facilities are as prepared to run 24/7 during those periods of high demand. As you know, we're tying in Mitchell and Mountaineer environmental add-ons even as we speak so that we will be well prepared for the '07 demand cycle. If you look at the refueling outages at Cook, the reactor vessel had activity that’s going quite nicely even as we speak, obviously is in a shorter month, and we always try to time our outages along those lines. We have had an extremely successful run with the fleet. But remember, while we put capital work on the environmental side of the plants Bill Sigmund and his team are doing a great deal of refurbishment on the more traditional side of the power plant as well. So I have every expectation that we will have more than adequate generation capacity and have every confidence in Brian Tierney and the commercial ops folks that they will turn that into the highest margin achievable for us.

Daniel Eggers - Credit Suisse First Boston

And I guess Mike, not to belabor this, but July and August were pretty hot months for you guys, (inaudible) more of that available capacity would have committed to incumbent load, if you assume a more normal weather environment, does that mean there is even more outputs potentially available to sell into the good margin period.

Mike Morris

What we see Dan, if you see a really high peak demand, we won't have additional megawatts put in the marketplace because the peak demand would be across the footprint. However you would see prices escalate substantially in those areas that are generation short, and not power transmission short, and we would take full advantage of that.

Daniel Eggers - Credit Suisse First Boston

Okay, thank you guys.

Mike Morris

Yeah, you bet.

Operator

Thank you, and our next question is from Greg Gordon, please go ahead.

Greg Gordon - Citigroup

Hi Mike, long-term no see.

Mike Morris

Yeah, I'll say, how is that little girl of yours doing?

Greg Gordon - Citigroup

She's okay.

Mike Morris

Very good. Nice to see her.

Greg Gordon - Citigroup

Most of the detailed questions on the quarter were answered, so let me ask you a broader question as we approach the mid-term elections here, and on a national level, federal level, under the state level it appears that the democrats may gain significant traction, what types of legal and regulatory changes would you envision we should be thinking about when it comes to your profile in terms of carbon regulation, dividend taxes, the willingness at the state level to promote IGCC. Is the mid-term election meaningful or should we be focused on the presidential election in '08?

Mike Morris

I would expect that you’re asking some pretty detailed questions and one person's political view isn’t necessarily a majority, but to your question let me simply say, as to the carbon issue I would expect you all to look to the '08 presidential election as being a potential change there. If you move into a house and Senate change then it becomes a very aggressive carbon cycle, I would expect some statements made by the White House that that would be among the first vetos that the Whitehouse would exercise, I could be wrong about that but at least that’s one's impression.

As to the State House issue on integrated gas, Governor Manchin is not up for re-election nor is the Virginia Governor. So that shouldn’t affect the Appalachian undertaking. Here in Ohio remember that Congressman [Struttman] who apparently has a relatively large lead but as you know prognosticators frequently miss the mark but should the Congressmen be successful he serves Megs County. He understands the potential upside that the IGCC plant here in Ohio would mean for that county. But again that’s a regulatory process. As I said before I would expect that Chairman [Schreiber] would continue to serve under either democratic or republican administration because he is a registered independent.

As to the regulatory change across the footprint I can't think of a jurisdiction where a gubernatorial change would have a negative impact, Governor Daniels isn't up for reelection, Governor Granholm in Michigan is but we've --everything seems to go reasonably well there. The Kentucky issue is clearly right. Texas looks like Governor Perry succeeds. So we watch that pretty closely. Governor Huck would be of course -- he isn’t standing for re-election. But Sandy Hockstetter has done a tremendous job with the Arkansas commission and I’m sure as to -- a succeeding governor might want her to continue to sit. So when we look at the landscape, the elections don't trouble us at all, the only thing that troubles us is how much the democrats hate any idea that's republican and how much republicans hate any idea that's democratic. And I guess that's just might want for the country to get overall of this battling and get on with managing the economy and managing the potential for this country. I'll get off my political soapbox now.

Greg Gordon - Citigroup

Thanks Mike.

Mike Morris

You bet that. Thanks.

Operator

Alright thank you. (Operator Instructions). And we do have a follow up question from Craig Shere, please go ahead.

Craig Shere - Calyon Securities

I just want to see if Holly had a chance to check on the depreciation maybe we could take it offline if there hasn't been enough time?

Holly Koeppel

The differential we believe is associated with the Texas Retail Clawback. But if you'd like to close -loop with Betty, Joe, or Julie after this call please give them a ring.

Craig Shere - Calyon Securities

Great thanks a lot.

Operator

Thank you. And I'm showing no further questions at this time please continue.

Mike Morris

Well thank you very much for taking the time to be with us. I know you've got a handful of other calls to do today. We are quite pleased with the quarter and quite pleased with our guidance for not only ‘06 but '7, '8, '9. Thanks for the support. Bye now.

Operator

Ladies and gentlemen this conference will be available for replay after 12:30 pm today through November 7th at midnight. You may access the AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 843-402. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code 843-402. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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Source: American Electric Power Q3 2006 Earnings Call Transcript
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